A third round of quantitative easing, QE3, by the Federal Reserve now has a greater than 50% chance of launching by early 2012, according to Goldman Sachs’ chief U.S. economist, Jan Hatzius.
In a note to clients, Hatzius wrote that yesterday’s Fed statement caused the firm to change its forecast because it “suggests that the committee’s reaction function to incoming economic news is more dovish than we had previously thought.”
The Goldman economist went on to say that “Although Fed officials still expect a gradual decline in the unemployment rate, they made a conditional commitment to keep the funds rate unchanged ‘at least through mid-2013′ and implied that they would employ additional policy tools in case their economic forecast deteriorated further. This would probably mean more QE if their forecast converged to our own modal view of a flat-to-higher unemployment rate through the end of 2012, let alone our downside risk case of a renewed recession.”
“If there is additional easing, it would likely take the form of QE,” he continued. “After all, ‘these tools’ mentioned in the statement presumably need to be more powerful – or at least not much less powerful – than the action taken today in order to avoid a sense of anti-climax. This means that they are unlikely to consist of small incremental steps such as a commitment to keep the balance sheet large, a gradual shift of the securities portfolio into longer maturities, or a cut in the interest rate on excess reserves from 25 basis points (bp) to zero. This leaves the stronger options, which include QE as well as even more aggressive forms of easing such as rate caps (a form of QE in which the Fed promises to buy as many securities as needed to hit a longer-term yield target), a price level or nominal GDP target, or interventions in non-government securities markets (for which funding from Congress would be needed). Of these, ‘conventional’ QE is very likely the option with the lowest hurdle, and the first one to be deployed.”
Hatzius also addressed the argument that the three dissenting votes will cause the Fed to not embark on QE3. ”We disagree strongly with one argument against further QE that we heard frequently today – namely that the three dissents from Presidents Fisher, Kocherlakota, and Plosser indicate ‘the end of the line’ for further Fed easing and difficulty for the chairman to get his way.”
“On the contrary, we view Chairman Bernanke’s willingness to live with the dissents as a strong signal that he and the rest of the Fed leadership view the need for renewed easing as more important than the institutional norm of consensus decisionmaking. There is no question that Bernanke will always have enough votes, and we fully expect him to use these votes to provide further support to the economy if he views it as necessary.”
Hatzius did not discuss the implications of QE3 for the markets in his note, but they would likely be bullish for the gold and silver markets.
Mines Management Reports Results of Annual Meeting
- Mines Management provided a recap of results from the first quarter of 2011, which included a $15.2 million capital raise to advance its flagship Montanore Project.
- Mine and Quarry Engineering Services finalized the Preliminary Economic Assessment (PEA) of Montanore during the quarter, which was prepared to provide guidance on the potential viability of the project and the basis for the continuation of exploration activities.
- The company noted that a Record of Decision (ROD) approving the proposed Mine Plan of Operations could occur in 2012, which would allow exploration and mine development work to commence.